IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Erie Insurance Exchange, :

an unincorporated association, by :

Joseph S. Sullivan and Anita Sullivan, :

Jenna L. DeBord, and Patricia R. :

Beltz, trustees ad litem, and/or as :

members of Erie Insurance Exchange, :

Petitioners :

:

v. : No. 872 C.D. 2015

: Argued: December 9, 2015

Pennsylvania Insurance Department, :

Respondent :

BEFORE: HONORABLE DAN PELLEGRINI, President Judge1

HONORABLE BONNIE BRIGANCE LEADBETTER, Judge

HONORABLE RENÉE COHN JUBELIRER, Judge

HONORABLE ROBERT SIMPSON, Judge

HONORABLE MARY HANNAH LEAVITT, Judge2

HONORABLE P. KEVIN BROBSON, Judge

HONORABLE PATRICIA A. McCULLOUGH, Judge

OPINION BY JUDGE BROBSON FILED: January 27, 2016 

Petitioners Joseph S. Sullivan, Anita Sullivan, Jenna L. DeBord, and 

Patricia R. Beltz, purportedly acting on behalf of Erie Insurance Exchange 

(Exchange), an unincorporated association, petition for appellate review of an 

April 29, 2015 Declaratory Opinion and Order by then-Acting Insurance 

 

1

This case was assigned to the opinion writer on or before December 31, 2015, when 

President Judge Pellegrini assumed the status of senior judge.

2

This case was assigned to the opinion writer before January 4, 2016, when Judge 

Leavitt became President Judge.
2

Commissioner (Commissioner) Teresa D. Miller.

3

 That decision places the 

Commissioner’s regulatory imprimatur on “transactions between . . . Exchange and 

Erie Indemnity Company (Indemnity)4in which Indemnity retained or received 

revenue from installment and other service charges from Exchange subscribers.” 

Specifically, the Commissioner concluded that these transactions did not violate 

Article XIV of the Insurance Company Law of 1921, commonly referred to as the 

Insurance Holding Companies Act (IHCA).5 For the reasons set forth below, we 

vacate the Commissioner’s decision and remand this matter for further 

proceedings.

I. BACKGROUND

Petitioners initiated their lawsuit against Indemnity in the Court of 

Common Pleas of Fayette County (trial court) in 2012. At present, Petitioners are 

proceeding under their Second Amended Complaint. (Reproduced Record (R.R.) 

6a-18a.)6 Petitioners allege that they are members of Exchange. Exchange is a 

reciprocal insurance exchange organized under the laws of the Commonwealth of 

Pennsylvania.7 Exchange is part of a group of affiliated companies, known as the 

 

3

The Pennsylvania Senate confirmed Commissioner Miller’s appointment on June 3, 

2015.

4

Indemnity intervened in this matter by filing a notice of intervention.

5

Sections 1401-1413 of the Act of May 17, 1921, P.L. 682, added by Section 19 of the 

Act of December 18, 1992, P.L. 1519, as amended, 40 P.S. §§ 991.1401-.1413.

6

The factual background set forth herein is gleaned from both the Second Amended 

Complaint and the parties’ Joint Statement of Undisputed Facts (Stipulation), (R.R. 34a-80a),

filed with the Commission as part of this matter.

7

Sections 1001-1011 of the Insurance Company Law of 1921, Act of May 17, 1921, P.L. 

682, as amended, 40 P.S. §§ 961-971 (Article X).
3

Erie Group, and thus is part of an insurance holding company system. See Section 

1401 of the IHCA, 40 P.S. § 991.1401 (defining “insurance holding company 

system”). A reciprocal insurance exchange is a vehicle through which individuals 

or entities, called “subscribers,” can exchange contracts to indemnify each other 

for losses. Section 1001 of Article X, 40 P.S. § 961. Simply stated, it is a type of 

insurance company.

Under Article X, the subscribers of a reciprocal insurance exchange 

may appoint an attorney-in-fact to issue the contracts of insurance to the 

subscribers—i.e., to conduct the business of the exchange. Section 1003 of Article 

X, 40 P.S. § 963. Since Exchange’s inception in 1925, Indemnity has served as the 

designated attorney-in-fact for Exchange. As the attorney-in-fact, Indemnity is 

required to make periodic filings with the Pennsylvania Insurance Department

(Department) and to procure annually from the Commissioner a certificate of 

authority to act as attorney-in-fact. Sections 1004-1007 of Article X, 40 P.S. 

§§ 964-967.

As the attorney-in-fact for Exchange and part of the Erie Group 

insurance holding company system, Indemnity’s authority to act on behalf of 

Exchange and its subscribers is prescribed by both governing Pennsylvania 

insurance laws and its agreement with Exchange’s subscribers—the Subscriber’s 

Agreement. (R.R. 81a). In their Second Amended Complaint, Petitioners seek to 

recover sums allegedly due to Exchange that Petitioners claim have been 

wrongfully appropriated by Indemnity as attorney-in-fact. (Compl. ¶ 9.) 

Petitioners allege that under the Subscriber’s Agreement, Indemnity agreed to 

perform certain services for Exchange, including managing Exchange’s business 

affairs; issuing, cancelling, or nonrenewing policies; and collecting premiums, 
4

which includes the processing of invoices for the collection of premiums. (Compl. 

¶¶ 23-24.) In return for these services, Petitioners allege that under the 

Subscriber’s Agreement, Indemnity is to be paid a “maximum fee . . . [of] 25% of 

all written and assumed premiums received by Exchange.” (Compl. ¶ 20.)8

Petitioners allege that prior to September 1, 1997, certain subscribers 

of Exchange who paid their insurance premium in installments paid a fixed fee, 

which Petitioners refer to as a “Service Charge,” to Exchange as consideration for 

the installment plan. (Compl. ¶ 26.) Beginning on September 1, 1997, Petitioners 

allege that Indemnity began to keep the Service Charges for itself, rather than pass 

the monies on to Exchange. Petitioners allege that Indemnity kept these funds “in 

addition to” the compensation provided in the Compensation Provision of the 

Subscriber’s Agreement. Petitioners further allege that beginning in 2008, 

Indemnity began to assess Exchange subscribers late payment and policy 

 

8

The paragraph of the Subscriber’s Agreement relating to compensation (Compensation 

Provision) provides:

3) You [(the subscriber)] agree that as compensation for us 

[(Indemnity)] a) becoming and acting as Attorney-In-Fact; 

b) managing the business and affairs of [Exchange]; and 

c) paying general administrative expenses, including sales 

commissions, salaries and employee benefits, taxes, rent, 

depreciation, supplies and data processing, we may retain up 

to 25% of all premiums written or assumed by [Exchange]. 

The rest of the premiums will be used for losses, loss 

adjustment expenses, investment expenses, damages, legal 

expenses, court costs, taxes, assessments, licenses, fees, any 

other government fines and charges, establishment of reserves 

and surplus, and reinsurance, and may be used for dividends 

and other purposes we decide are to the advantage of the 

Subscribers.

(R.R. 81a.)
5

reinstatement fees, which Petitioners refer to as “Added Service Charges,” but did 

not pass those collected funds on to Exchange. Petitioners complain that 

Indemnity took these actions without amending the Subscriber’s Agreement.

(Compl. ¶¶ 27-28.)

Petitioners’ six-count pleading essentially advances three legal 

theories. First, Petitioners contend that in retaining the Service Charges and the 

Added Service Charges, Exchange has breached the Subscriber’s Agreement, and 

its duty of good faith and fair dealing related thereto, by taking additional 

compensation (i.e., compensation beyond the up to 25% of premiums paid by 

Exchange subscribers) for services that Exchange was required to perform as 

attorney-in-fact for the compensation set forth in the Compensation Provision of 

the Subscriber’s Agreement. (Compl. ¶¶ 34, 35, 53, 54, 76, 77.) Second, 

Petitioners allege that by retaining the Service Charges and Added Service 

Charges, Indemnity took economic advantage of its attorney-in-fact status and 

entered into an “Intercompany Transaction” with Exchange for its own profit, in 

breach of its role as a fiduciary of Exchange. (Compl. ¶¶ 38-41, 57-60, 80-83.) 

Third, but somewhat related to both their assumpsit and breach of fiduciary duty 

claims, Petitioners complain that Indemnity has been unjustly enriched by its 

conduct. Petitioners seek equitable relief in the form of an accounting of all 

“Intercompany Transactions” between Indemnity and Exchange from January 

1996 to the present; an injunction barring Indemnity from receiving compensation 

for its attorney-in-fact services other than that permitted in the Compensation 

Provision of the Subscriber’s Agreement; an order of restitution and creation of a 

constructive trust; and “such other relief as may be appropriate.” (Compl. 

¶¶ 46-50, 65-69, 88-92.)
6

According to the trial court’s December 19, 2013 Opinion and Order,

(R.R. 19a-25a), Indemnity lodged eight preliminary objections to the Second 

Amended Complaint. The trial court overruled the first, sustained the second, and 

deferred ruling on the remaining preliminary objections.9 In its second preliminary 

objection, Indemnity, invoking the doctrine of primary jurisdiction, requested that 

the trial court stay further proceedings and refer issues raised in the Second 

Amended Complaint that fall within the Department’s area of expertise to the 

Department for consideration. Through its December 19, 2013 Order, (R.R. 25a),

and a subsequent amending order, (R.R. 26a-27a), the trial court did just that.10

Upon referral, the parties sought a status conference with the 

Department.11 A binder of “Relevant Pleadings, Motions, and Briefing” from the 

trial court was filed with the Department. On March 17, 2014, then-Insurance 

Commissioner Michael F. Consedine appointed James A. Johnson to serve as 

 

9 Not yet decided by the trial court are Indemnity’s preliminary objections that raise the 

question of whether Petitioners may commence their civil action and raise their claims set forth 

in the Second Amended Complaint in the name and on behalf of Exchange.

10 Petitioners sought an interlocutory appeal of the trial court’s decision to the 

Pennsylvania Superior Court, but they were unsuccessful. (Certified Record (C.R.), Dep’t 

Docket Ex. 28.)

11 In a March 13, 2014 letter to the Administrative Hearing Office of the Department, 

counsel for Petitioners noted with respect to their participation in proceedings before the 

Commissioner: “[W]e maintain that the doctrine of primary jurisdiction is not applicable to this 

litigation, and do not intend, by participating in a meeting, to waive that issue.” (C.R., Dep’t 

Docket Ex. 4.) An Order of the Presiding Officer later confirmed Petitioners’ preservation of 

this issue. (C.R., Dep’t Docket Ex. 19.) Accordingly, we reject Indemnity’s argument, raised at 

pages 33 and 36-39 of its brief, that Petitioners have waived their right to challenge the referral 

by the trial court and/or the scope of issues decided by the Commissioner upon referral or should 

be estopped from challenging such matters because of their participation, under protest, in the 

proceedings before the Commissioner.
7

Presiding Officer. The Presiding Officer conducted a conference, after which he 

issued an April 21, 2014 Order, directing, inter alia, the parties to each file a 

statement of proposed issues to be decided by the Commissioner, but encouraging 

a joint statement if possible. The parties submitted separate and somewhat 

conflicting statements. Thereafter, the Presiding Officer issued a May 30, 2014 

Order, setting forth the issue to be decided as follows:

The issue in these proceedings is whether 

[Indemnity’s] retention of service charges and added 

service charges as defined in the plaintiffs’ underlying 

second amended complaint meets the standards set forth 

in the [IHCA], including but without limitation whether 

those transactions were fair and reasonable.

(C.R., Dep’t Ex. 32.) In a later order, the Presiding Officer held that Exchange, as 

the party seeking relief, bore the initial burden of production and the ultimate 

burden of persuasion by a preponderance of the evidence on this issue. (C.R., 

Dep’t Ex. 51.)

The parties engaged in discovery and filed the Stipulation (including 

229 separately-numbered paragraphs) on September 3, 2014. The parties 

described the transactions at issue as follows: (1) from September 1, 1997, through 

1998, Indemnity started to retain a portion of the Service Charges collected from 

Exchange subscribers and not pass the full amount on to Exchange; (2) from 1999 

forward, Exchange retained all Service Charges; and (3) beginning in 2008, 

Indemnity began to collect from Exchange subscribers the Added Service Charge 

and retained all Added Service Charge funds collected (collectively, Transactions). 

(R.R. 51a-52a, 58a-60a.) The parties stipulated to the admission of exhibits. 

The Presiding Officer took administrative notice of certain facts. The parties filed 

briefs, and the Presiding Officer heard oral argument on January 6, 2015.
8

Thereafter, the Commissioner issued the determination that is the 

subject of this appeal. In that determination, the Commissioner noted that “[t]he 

sole issue before the Department is whether the transactions[, meaning the 

retention of service charges and added service charges by Indemnity,] violated the 

standards contained in the IHCA.” (Declaratory Op. at 47.) Petitioners contended 

that the Transactions, or Indemnity in effectuating the same, violated the following 

three standards in the IHCA:

Transactions within an insurance holding company 

system to which an insurer subject to registration is a 

party shall be subject to all of the following standards:

(i) The terms shall be fair and reasonable.

. . . .

(iii) Expenses incurred and payment received 

shall be allocated to the insurer in conformity with 

customary insurance accounting practices consistently 

applied and all cost-sharing or expense allocation 

arrangements must be formalized in writing and 

authorized by the board of directors of the domestic 

insurer.

(iv) The books, accounts and records of each 

party to all such transactions shall be so maintained as to 

clearly and accurately disclose the nature and details of 

the transactions, including such accounting information 

as is necessary to support the reasonableness of the 

charges or fees to the respective parties.

Section 1405(a)(1)(i), (iii), (iv) of the IHCA, 40 P.S. § 991.1405(a)(1)(i), (iii), (iv)

(emphasis added). According to the Commissioner, Petitioners contended that the 

Transactions violated the “fair and reasonable” standard in the IHCA because 

(a) they were contrary to the terms of the Subscriber’s Agreement; (b) there was a 

lack of disclosure and independent review of the transactions; and (c) they were 

substantively unfair to Exchange. (Declaratory Op. at 75.) The Commissioner 
9

analyzed and rejected each of these contentions. (Id. at 75-81, 82-84). She also 

rejected Petitioners alleged violations of the other statutory standards. (Id. at 

81-82.) This appeal followed.12

II. DISCUSSION

On appeal, Petitioners argue legal error and contest one of the 

Commissioner’s factual findings. As for legal error, Petitioners contend that the 

Department erred by asserting primary jurisdiction over Petitioners’ common law 

tort and contract claims against Indemnity. To the extent the Commissioner 

appropriately ruled on Petitioners’ breach of contract claim, Petitioners argue that 

she erred in concluding that Indemnity did not breach the Subscriber’s Agreement

and that Indemnity satisfied its fiduciary duty to Exchange. Petitioners also 

contend that the Commissioner erred in concluding that the Transactions did not 

violate the above-quoted standards in the IHCA.

In Pettko v. Pennsylvania American Water Company, 39 A.3d 473 

(Pa. Cmwlth. 2011), appeal denied, 51 A.3d 840 (Pa. 2012), this Court observed:

[T]he doctrine of primary jurisdiction permits the 

bifurcation of a plaintiff’s claim, whereby a trial court, 

 

12 We note that this Court must affirm the Commissioner’s determination unless we find 

that it violates Petitioners’ constitutional rights, it is not in accordance with law, it violates a 

practice or procedure of Commonwealth agencies, or a necessary finding of fact is not supported 

by substantial evidence. Section 704 of the Administrative Agency Law, 2 Pa. C.S. § 704; 

Graduate Health Sys., Inc. v. Pa. Ins. Dep’t, 674 A.2d 367, 370 (Pa. Cmwlth. 1996). Though 

this matter commenced before the Commissioner on referral from the trial court, Petitioners have 

properly invoked this Court’s appellate jurisdiction under Section 763(a) of the Judicial Code, 

42 Pa. C.S. § 763(a), for judicial review of the Commissioner’s determination before the matter 

reverts back to the trial court. Elkin v. The Bell Tel. Co. of Pa., 420 A.2d 371, 376 & n.6 

(Pa. 1980) (holding that notwithstanding bifurcated process of primary jurisdiction, review of 

agency determination upon referral should proceed “through normal channels”); see Pettko v. Pa. 

Am. Water Co., 39 A.3d 473, 480 (Pa. Cmwlth. 2011), appeal denied, 51 A.3d 840 (Pa. 2012).
10

faced with a claim requiring the resolution of an issue 

that is within the expertise of an administrative agency, 

will first cede the analysis of the issue or issues to that 

agency. Once the agency resolves the particular issue or 

issues over which it has primary jurisdiction, the trial 

court may proceed, if necessary, to apply the agency’s 

decision to the dispute remaining before the trial court. 

The doctrine “creates a workable relationship between 

the courts and administrative agencies wherein, in 

appropriate circumstances, the courts can have the 

benefit of the agency’s views on issues within the 

agency’s competence.”

Pettko, 39 A.3d at 479 (quoting Elkin v. The Bell Tel. Co. of Pa., 420 A.2d 371, 

376 (Pa. 1980)). Once the administrative agency decides the matter(s) referred, the 

trial court must adhere to the agency’s determination in the trial court proceeding. 

Id. at 479-80. As we noted in Pettko, however, the Supreme Court of Pennsylvania

has instructed that the doctrine of primary jurisdiction must be used sparingly and 

under the appropriate circumstances:

[W]here the subject matter is within an agency’s 

jurisdiction and where it is a complex matter requiring 

special competence, with which the judge or jury would 

not or could not be familiar, the proper procedure is for 

the court to refer the matter to the appropriate agency. 

Also weighing in the consideration should be the need for 

uniformity and consistency in agency policy and the 

legislative intent. Where, on the other hand, the matter is 

not one peculiarly within the agency’s area of expertise, 

but is one which the courts or jury are equally well-suited 

to determine, the court must not abdicate its 

responsibility. In such cases, it would be wasteful to 

employ the bifurcated procedure of referral, as no 

appreciable benefits would be forthcoming.

Elkin, 420 A.2d at 377 (footnote omitted) (emphasis added). Finally, we look to 

the plaintiff’s allegations, not to the form of the pleading or the cause(s) of action 

asserted, to determine whether the doctrine of primary jurisdiction applies. Pettko, 

39 A.3d at 480; see also Poorbaugh v. Pa. Pub. Util. Comm’n, 666 A.2d 744, 
11

750 (Pa. Cmwlth. 1995) (“[A] court must look to the essence of the underlying 

claims, rather than to magic words, in determining where jurisdiction properly 

lies.”), appeals denied, 678 A.2d 367 (Pa. 1996) and 698 A.2d 69 (Pa. 1995).

We now consider, as we did in Pettko and Poorbaugh, Petitioners’ 

challenge to the scope of the trial court’s referral to the administrative agency—

here, the Department. Petitioners contend that theirs is a simple (not complex) 

common law civil action for breach of contract and breach of fiduciary duty, over 

which the Department has no particular expertise. Absent from the Second 

Amended Complaint, Petitioners contend, is any allegation that the Transactions 

are unfair or unreasonable, such that the standards set forth in the IHCA are 

implicated. Instead, Petitioners’ challenge to the Transactions is two-fold—

(1) they violate the terms of the Subscriber’s Agreement, and (2) they violate 

Indemnity’s duty as fiduciary to Exchange. Because the nominal parties to the 

lawsuit happen to be members of the same insurance holding company system, the 

IHCA does not vest the Department with jurisdiction over Petitioners’ common 

law claims. Finally, Petitioners, in essence, contend that the referral to the 

Department was meaningless. The Commissioner’s determination that the 

Transactions complied with standards set forth in the IHCA has no bearing on 

whether the Transactions violated the terms of the Subscriber’s Agreement or 

whether Indemnity breached its fiduciary duty to Exchange. According to 

Petitioners, “neither fairness nor reasonableness are elements for those claims.” 

(Pet’r’s. Br. at 22.)

In response, the Department contends that Petitioners elevate the form 

of their claims over their substance. The Department argues that Petitioners’ suit

against Indemnity is nothing more than a challenge to an inter-company transaction 
12

regulated by the Department under the IHCA. “Without a determination that such 

transactions violate an insurance law,” the Department contends, “it is unlikely that 

Petitioner[s] would be successful in [their] claims before the trial court.” (Dep’t 

Br. at 18.) The Department contends that the Commissioner only examined 

Petitioners’ breach of contract and fiduciary duty claims in the context of 

determining violations of the IHCA. The Department notes that it decided a matter 

that squarely falls within the scope of its expertise, that being whether the 

Transactions violated the IHCA.

Indemnity contends that Petitioners brought their complaint in the 

name of one member of an insurance holding company system against another 

member of that same system, challenging regulated inter-company transactions. 

This, according to Indemnity, supports the trial court’s referral of the matter to the 

Department to determine compliance with the IHCA. Moreover, the 

Commissioner appropriately exercised the broad discretion afforded to her by 

considering the sub-issues of whether Indemnity breached the Subscriber’s 

Agreement or its fiduciary duty to Exchange in order to assess whether the 

Transactions were “fair and reasonable” under the IHCA. Finally, Indemnity 

contends that the Department’s regulatory authority over reciprocal exchanges 

under Article X extends to determinations of whether an attorney-in-fact violates 

the terms of a subscriber’s agreement and, if so, determining the appropriate 

remedy.

All parties agree that the challenged Transactions are subject to a 

fairness and reasonableness review by the Department under Section 1405(a)(1)(i) 

of the IHCA. With respect to certain inter-company transactions, the involved 

insurer must provide 30-days advance written notice of the transaction to the 
13

Department (unless the Department approves a shorter period). Unless 

disapproved by the Department within that period, the inter-company transaction 

may proceed. Section 1405(a)(2) of the IHCA, 40 P.S. § 991.1405(a)(2). The 

transactions at issue here do not fall within any of the categories of inter-company 

transactions that require prior notice and review by the Department.

Nonetheless, transactions that are exempt from the prior notice and 

review provision of the IHCA do not necessarily escape Department scrutiny. 

Section 1406(a.1) of the IHCA13 expressly empowers the Department to examine 

an insurer that is part of an insurance holding company system to determine 

compliance with the IHCA. In addition, Section 1410(c) of the IHCA14 expressly 

addresses inter-company transactions exempt from prior notice and review by the 

Department:

Whenever it appears to the [D]epartment that any 

insurer subject to this article or any director, officer, 

employe or agent thereof has engaged in any transaction 

or entered into a contract which is subject to [S]ection

1405 [of the IHCA] and which would not have been 

approved had such approval been requested, the 

[D]epartment may order the insurer to cease and desist 

immediately any further activity under the transaction or 

contract. After notice and hearing, the [D]epartment may 

also order the insurer to void any such contracts and 

restore the status quo if such action is in the best interest 

of the policyholders, creditors or the public.

 

13 40 P.S. § 991.1406(a.1).

14 40 P.S. § 991.1410(c).
14

There is no indication in the record before us that the Department has ever 

exercised its authority under these provisions of the IHCA to scrutinize the 

transactions that are the subject of Petitioners’ Second Amended Complaint.

As a preliminary matter, we reject the notion, adopted by all parties in 

one form or another, that Petitioners’ breach of contract claim is inextricably

intertwined with regulatory review of the Transactions for fairness and 

reasonableness under the IHCA. Whether a particular transaction satisfies a 

regulatory standard does not necessarily preclude a subsequent civil action. See 

Drain v. Covenant Life Ins. Co., 712 A.2d 273, 277-78 (Pa. 1998) (allowing tort 

claims relating to Department-approved transaction to proceed in common pleas 

court). For example, upon completing the construction of a home, it may be 

entirely fair and reasonable—in terms of time, materials, and effort—for a 

homebuilder to charge the buyer $500,000 for the construction of the home. 

Where the parties had entered into a contract for a sale price of $250,000, it would 

be a breach of contract for the homebuilder to demand more before tendering the 

completed home to the buyer. Similarly, within an insurance holding company 

system, it may be “fair and reasonable” for the attorney-in-fact to assess 

subscribers a premium finance fee or late fee and to retain all or a portion of the 

fees collected to offset the attorney-in-fact’s costs and/or to compensate the 

attorney-in-fact for premium finance and collection services on behalf of a 

reciprocal insurance exchange. If, however, the attorney-in-fact entered into a 

contract that precludes such a practice, fair and reasonable as it may be, the 

attorney-in-fact would be in breach.

We acknowledge, then, based on the intent of the General Assembly 

expressed in the IHCA, that the Department possesses both the jurisdiction and the 
15

special competency to review and decide whether an inter-company transaction 

within an insurance holding company system is both fair and reasonable. We also 

recognize, as set forth above, the authority of the Department to interpret and 

enforce other provisions of the IHCA. The issue before us is whether the Second 

Amended Complaint purports to challenge any of these matters within the 

Department’s regulatory authority and expertise under the IHCA.

Although the parties have cited several cases to support their 

respective positions, we find most instructive the Pennsylvania Supreme Court’s 

decision in Drain. In 1994, the Pennsylvania Insurance Commissioner granted 

regulatory approval under the IHCA to the merger of Covenant Life Insurance 

Company (Covenant) and Provident Mutual Life Insurance Company 

(Provident).15 Following that approval, Covenant policyholders initiated a suit in 

the court of common pleas against Covenant and its directors. In the first count of 

their complaint, the policyholders sought to assert a derivative action on 

Covenant’s behalf, alleging breaches of fiduciary duty, waste, and abuse of control 

by the directors in connection with effectuating the merger. In the second count, 

titled a claim “for fundamental unfairness of the merger,” the policyholders 

asserted a class action claim on behalf of all policyholders for breaches of fiduciary 

duties and failure to disclose material facts relative to the merger. 

The policyholders also contended that the directors engaged in tactics that resulted 

in an unfair merger. Drain, 712 A.2d at 274-75. 

 

15 See Section 1402 of the IHCA, 40 P.S. § 991.1402 (requiring Department approval of 

acquisitions of control of or merger or consolidation with domestic insurer).
16

The defendants filed preliminary objections, challenging, inter alia, 

the trial court’s jurisdiction over the policyholders’ claims. The common pleas 

court sustained the preliminary objection. It held that the policyholders’ claims 

related to the “fairness” of the merger, which was a matter already decided by the 

Pennsylvania Insurance Commissioner when she reviewed and approved the 

transaction.16 In the common pleas court’s view, policyholders could not 

collaterally attack the Insurance Commissioner’s approval through a separate civil 

action in the common pleas court; rather, they should have appealed the approval 

of the merger to this Court. The Pennsylvania Superior Court reversed, rejecting 

the common pleas court’s view that the claims in the complaint fell within the 

Insurance Commissioner’s jurisdiction.

On further appeal by allowance, the Pennsylvania Supreme Court 

affirmed the Superior Court’s decision. The Supreme Court noted that although 

the IHCA provides for Department approval or disapproval of proposed mergers, it 

does not “explicitly provide a mechanism for the . . . Department to address alleged 

torts incident to a merger nor does it expressly grant authority to order a remedy 

for tortious conduct.” Id. at 276. Citing with approval this Court’s decision in 

Trustees of the Presbytery v. Provident Mutual Life Insurance Company, 685 A.2d 

635 (Pa. Cmwlth. 1996), the Supreme Court recognized “statutory limits” to the 

Department’s authority, which placed both tort claims and claims for corporate 

 

16 Under Section 1402(f)(1) of the IHCA, 40 P.S. § 991.1402(f)(1), the Department may 

only disapprove a filing for seven specified reasons. One of those reasons is if the Department 

finds that the plans or proposals submitted to the Department “are unfair and unreasonable.” 

Section 1402(f)(1)(iv).
17

malfeasance outside of the Department’s particular and specialized expertise. Id.

at 276-77. The Supreme Court then opined:

The resolution of the present dispute thus depends 

upon whether the policyholders’ Complaint collaterally 

attacks the Insurance Commissioner’s approval of the 

merger based upon insurance laws or whether it seeks to 

have the trial court adjudicate tort claims incidental to the 

merger. We agree with the Superior Court that the 

Complaint seeks relief for alleged torts and thus 

jurisdiction lies in the Court of Common Pleas.

Id. at 277. In analyzing the complaint, the Supreme Court noted that the 

policyholders alleged breaches of fiduciary duty by failing to consider fully and 

fairly the impact of the merger transaction upon policyholders and by failing to 

disclose information in the proxy statement issued before the merger. It then 

concluded:

While the Complaint contains allegations about the 

fairness of the merger as well as the consideration that 

Provident paid for Covenant’s surplus under the terms of 

the merger plan, when read as a whole, the claims 

against Appellants are for alleged improprieties in 

consummating the merger. If as this litigation proceeds, 

it becomes apparent that the policyholders in fact seek to 

challenge the Commissioner’s approval of the merger, 

the case shall be dismissed. The face of the Complaint, 

however, alleges tort claims that do not involve the 

consideration of insurance laws. Claims for breach of 

corporate fiduciary duties are properly before the trial 

court. As such, the preliminary objection based upon 

lack of jurisdiction may not be sustained.

Id. at 277-78 (emphasis added).

We acknowledge differences between this matter and Drain. In Drain

the jurisdictional issue came down to whether the plaintiff policyholders’ lawsuit 

was, in effect, a collateral attack on the Department’s approving determination 

under the IHCA. Drain, then, does not address the issue of primary jurisdiction. 
18

Here, by contrast, the Transactions were not subject to any prior notice to and 

review by the Department under the IHCA. Indeed, the Department did not review 

the Transactions under the IHCA until after Petitioners filed their suit in the trial 

court and then only upon referral by the trial court to the Department under the 

doctrine of primary jurisdiction. Nonetheless, in addressing the question of subject 

matter jurisdiction, the Supreme Court in Drain drew a line between the 

Department’s regulatory jurisdiction over transactions under the IHCA and civil 

matters in the common pleas court that, though related to the reviewed and 

approved transactions, do not implicate the Department’s specialized regulatory 

expertise.

As noted above, Petitioners’ six-count pleading essentially advances 

three causes of action: (1) breach of the Subscriber’s Agreement; (2) breach of 

fiduciary duty; and (3) unjust enrichment. The unifying allegation that is at the 

base of each of these three claims is that Indemnity improperly retained all or a 

portion of the Service Charges and Added Service Charges collected from 

Exchange subscribers. The focal point of the alleged impropriety in the breach of 

contract claims is the Subscriber’s Agreement, which Petitioners contend limits the 

amount of compensation that Indemnity may receive for its attorney-in-fact 

services. The focal point of the alleged impropriety in the breach of fiduciary duty 

and unjust enrichment claims is Petitioners’ theory that Indemnity had a duty to act 

in Exchange’s best interest and not to maximize Indemnity’s own profit.

We agree with Petitioners that the question of whether Indemnity 

breached the Compensation Provision of the Subscriber’s Agreement is not a 

complex matter that requires the special expertise of the Department. It is a matter 

of contract interpretation and fact finding, both of which are matters that fall within 
19

the competence of our trial courts. Although we acknowledge Indemnity’s 

contention that Article X requires an attorney-in-fact to file with the Department a 

copy of the document conferring powers on the attorney-in-fact to act for the 

reciprocal insurance exchange,17 we see no provision in the law that grants the 

Department exclusive power and authority to hear and decide questions of whether 

the attorney-in-fact has breached the terms of that filed document. Further, in 

reviewing the Commissioner’s analysis of Petitioners’ breach of contract claim, 

(Declaratory Op. at 76-78), we find no indication that the Commissioner relied on 

any particular specialized expertise in interpreting the relevant provisions in the 

Subscriber’s Agreement. Rather, she purported to rely only on principles of 

contract interpretation embedded in our common law.

In terms of Petitioners’ breach of fiduciary duty and unjust enrichment 

claims, they are similar in kind to the claims the Supreme Court addressed in 

Drain. Again, the Transactions may have been entirely fair and reasonable under 

the IHCA. Petitioners, however, maintain that Indemnity’s obligation as fiduciary 

to Exchange and the terms of the Subscriber’s Agreement precluded Indemnity 

from entering into these (and perhaps others) quite possibly “fair and reasonable” 

transactions for Indemnity’s own benefit. As the Supreme Court noted in Drain, 

the IHCA affords the Department the authority to review and approve or 

disapprove certain transactions within an insurance holding company system, but it 

“does not explicitly provide a mechanism for the . . . Department to address alleged 

torts incident to” such transactions. Drain, 712 A.2d at 276.

 

17 Section 1004(d) of Article X, 40 P.S. § 964(d).
20

The words “Intercompany Transactions” do appear in the Second 

Amended Complaint, along with allegations regarding “fair dealing.” When read 

as a whole, however, the Second Amended Complaint does not appear to challenge 

the fairness and reasonableness of the Transactions from a commercial or even 

regulatory standpoint. In drawing this conclusion, we expressly bind Petitioners to 

their representation in their brief: “Nowhere in the Second Amended Complaint 

did Exchange allege that the Transactions were somehow unfair or unreasonable

. . . .” (Pet’r’s. Br. at 21.) Moreover, we see nothing in the Second Amended 

Complaint that calls into question Indemnity’s compliance with the other statutory 

standards set forth in the IHCA which the Commissioner addresses in her 

Declaratory Opinion and Order.

For the reasons set forth above and based upon our reading of the 

Second Amended Complaint as a whole, we conclude that Petitioners’ allegations 

of impropriety relating to the Transactions do not fall within the Department’s 

jurisdiction and are not so complex that they require the special competency of the 

Department. Elkin, 420 A.2d at 377.

18

 Accordingly, and consistent with our 

disposition in Poorbaugh where we reached a similar conclusion about the Public 

Utility Commission’s exercise of primary jurisdiction, the Declaratory Opinion and 

Order of the Commissioner is vacated and this matter is remanded to the 

 

18 We note here that this case before the trial court is still in the early pleading stages. 

If, as the litigation proceeds, it becomes apparent to the trial court that Petitioners do, in fact, 

assert a claim or seek relief that implicates the Department’s jurisdiction and authority under the 

IHCA or any other insurance law or regulations, referral under the doctrine of primary 

jurisdiction may be appropriate at that point. See Drain, 712 A.2d at 278 (“If as this litigation 

proceeds, it becomes apparent that the policyholders in fact seek to challenge the 

Commissioner’s approval of the merger, the case shall be dismissed.”).
21

Department for transfer back to the trial court for further proceedings, including 

disposition of Indemnity’s remaining preliminary objections.19

 

 P. KEVIN BROBSON, Judge

Judge Cohn Jubelirer dissents.

 

19 Based upon our determination with respect to Petitioners’ threshold jurisdictional issue, 

we need not address the other issues raised on appeal.
IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Erie Insurance Exchange, :

an unincorporated association, by :

Joseph S. Sullivan and Anita Sullivan, :

Jenna L. DeBord, and Patricia R. :

Beltz, trustees ad litem, and/or as :

members of Erie Insurance Exchange, :

Petitioners :

:

v. : No. 872 C.D. 2015

:

Pennsylvania Insurance Department, :

Respondent :

O R D E R

AND NOW, this 27th day of January, 2016, the Declaratory Opinion 

and Order of the Pennsylvania Insurance Commissioner dated April 29, 2015, is 

VACATED, and the matter is REMANDED to the Pennsylvania Insurance 

Department for transfer back to the Court of Common Pleas of Fayette County for 

further proceedings.

Jurisdiction relinquished.

 

 P. KEVIN BROBSON, Judge